Blog post #456
It’s early August, 2020. In the US, this marks the beginning of the 6th month of dealing with Covid-19, which really started to impact the US in March.
What are we thinking about in terms of investing and financial planning now, and going forward?
What are the lessons of the past 6 months and how should we apply them moving forward?
Markets react quickly and unexpectedly: Stock markets in the US and globally reacted quickly as countries shut down due to the pandemic. Then, unexpectedly, beginning in late March, markets recovered strongly. Investors looked at the longer term view of recovery and how companies can adapt. However, companies and sectors that continue to be greatly affected by Covid-related challenges are still far off their pre-Covid price levels.
Stick to your asset allocation and financial plan: The rapid recovery of many stocks re-emphasizes why it is so difficult to time and predict the stock market. This is why we are strong believers in developing a long-term financial plan and adhering to that asset allocation.
We work with you to develop a financial plan, based on your goals, your need to take risk and your time frame. We don’t try to time the markets and we don’t base our advice on guesses and predictions.
There is still a long way to go: While there has been great progress in Covid treatments and initial vaccine development, a return to pre-Covid life is still likely to be many months, if not a year or two or even more into the future.
There is no way to know how long vaccine trials will take. We don’t know how many of the potential vaccines will be successful. Even when some are determined to be viable, distribution and receiving vaccines will take time, likely much longer than many now realize. And no one knows how effective any new vaccines will be.
Because of all these medical unknowns, we think it is important for each of us to be realistic and develop a long-term mentality related to this new Covid environment. We need to be resilient. How can you better adjust and adapt? As Covid issues will likely be with us for awhile, are there additional things that you can or should do, to help you and your family cope with this new world?
Is there anything you want to discuss with us, to help you cope?
How your investments will adapt: We focus on developing a very broadly diversified investment portfolio for you, as part of your investment plan. Even more today, we think being very diversified is vital and beneficial.
Your portfolio has growth and value companies, as well as large and small companies. We recommend investments both in the US and Internationally. Diversification, both in stocks and your fixed income holdings, has many benefits. The most important benefit is that you should not be materially impacted by any one industry or company.
As Covid continues in the future, we do not know which countries or companies may be more successful than others. Thus, broadly diversify. As my wife asked the other night during a walk, what will happen to stocks and companies that have hugely benefitted from Covid? Won’t they go down at some point? Will they be considered way overvalued in the future, as Covid is dealt with? We don’t know the answers, which is why a broadly diversified portfolio holds all types of companies, in varying amounts.
No company, industry or geographic region should cause a decline in your retirement lifestyle or your ability to reach your financial goals. Broad diversification provides this.
We want to stress the importance of thinking long-term, even though that means different things, depending on your age.
If you are in your 20s, 30s, 40s, or 50s, you have a very long life expectancy. You should not be focused on what is happening in the markets now. You should primarily focus on saving and investing. That is what I have done and will continue to do, regardless of what the markets are doing. I keep investing, every month, into the same funds and investments we recommend to our clients.
You need to have a positive mental attitude that our country and companies, both in the US and globally, will continue to evolve, grow, adapt and succeed. I believe that years and decades from now, the earnings of public companies will be greater than today, as the world and economies expand. I don’t know which stocks will be the best performers decades from now, which is why we believe in asset class investing as a core principle.
We are concerned about the impact of Covid on small businesses, industries and people that have been greatly affected by Covid, but that does not influence the long-term investment strategy of either our firm or me personally.
As you near or are in retirement, we stress the concept of a “fixed income foundation.” By this we mean that our goal for you is to have many years of your annual withdrawal needs in various fixed income investments, such as bonds, CDs, bond funds or cash.
For example, if you have $1 million of your $2 million portfolio in fixed income investments, and you withdraw $50,000 annually, you have a fixed income foundation of 20 years worth of withdrawals ($1 million divided by $50,000 = 20) and that assumes no interest on the fixed income.
If you have have many years of a fixed income foundation, then mentally we hope that you can focus on that, as your standard of living is not directly impacted by short term declines in the stock market.
Remember, regardless of how old you are, declines in a broadly diversified stock portfolio are temporary, and eventually give way to a more permanent uptrend in the growth of stock prices.
The harder concept for people to grasp, due to human nature, is that lower stock prices mean better value for stocks going forward. It is like a sale at a store (or online!). The store sales seem like a good bargain. Try to think of temporary stock declines like a sale at a store.
We see that periods of market turbulence or stock price declines cause great companies to react, adapt, adjust and add value for the long term. The companies that will succeed will figure out a way to do so, however they are able.
This is why we invest in all types of companies, because you can’t predict who and how they will succeed, and which will have better future stock market returns. For example, while growth companies have excelled, many companies that are now considered value companies trade at a fraction of growth companies’ valuations. Many of today’s cheap companies will succeed, and they will likely have strong stock market returns when we look back, 5 or 10 years from now.
Plan for the future.
Wear a mask.